Timely, accurate and understandable financial statements are vital to gauge how well a business has performed and to assess the strength of its financial position. Financial statements are a foundation upon which important business decisions are made.
Learn the differences among the three services that a certified public accountant (CPA) may perform to provide comfort to users of a business's financial statements.
What is a compilation?
Compilations are typically appropriate when businesses are seeking initial or lower amounts of financing. In these cases, a CPA does not provide any assurance. The CPA does not have to be independent, but the CPA must indicate a lack of independence, if applicable, in the report. The business obtains comfort that the financial statements appear to be appropriate in form and there are no obvious material modifications needed.
What is a review?
Reviews are usuallyappropriate as a business grows and seeks larger levels of financing. Here, the CPA must be independent from the client. Also, the CPA is required to perform inquiry and analytical procedures as a basis for obtaining limited assurance that the financial statements are free of material misstatement. The CPA issues a report as to whether the CPA is aware of any material modifications that should be made to the financial statements for them to be in accordance with the financial reporting framework.
What is an audit?
Audits are typically appropriate and often required for complex financing, such as seeking outside investors, seeking to sell a business or considering a merger. In these scenarios the CPA must be independent. The CPA is required to perform inquiry and analytical procedures, as well as to obtain an understanding of the business’s internal controls and assess the risk of material misstatement, including fraud risk. The CPA is also required to perform verification and substantiation procedures. With an audit theCPA obtains high, but not absolute assurance and issues a report that includes the CPA’s opinion as to whether the financial statements are in accordance with the financial reporting framework.
How to decide among a compilation, review, and audit?
In each instance, the CPA is engaged to perform the service so, the choice is up to the client. The choice among a compilation, review, and audit is ultimately about the needs of the business. Consult with a CPA to understand how each option reflects the goals of the business. Oftentimes, the CPA who performs a business’s general accounting and bookkeeping and prepares the annual tax return can also prepare financial statements and, if the CPA’s independence is not impaired, perform the appropriate service in order to meet a bank’s requirements.
How a compilation, review and audit is like inspecting a used car